TechScape: Inside the $8bn FTX crypto scandal – and its real-world impact

Every week after I finish writing this newsletter, I think: "Next week I'll try not to devote the whole email to a single topic. Some variety is always nice, and there are so many other things to write about."

And then everything keeps happening.

Sam Bankman-Fried, "SBF", was one of the good guys of crypto. He was what everyone wanted a crypto billionaire to be.

A young (30 now, but 25 when he founded his crypto hedge fund Alameda Research), visionary (his desire to earn more, he said, was only because it would enable him to donate to good causes), genius (an MIT undergraduate, gifted high-school mathematician, would wow investors on a Zoom call while playing video games in another tab).

SBF cared about doing things right - he worked with the US Securities and Exchange Commission (SEC) to draw up model legislation for regulating the cryptocurrency sector - and he tried to use his money to improve the world. He promised a billion dollars to the Democratic party, committed to donating vast amounts of his fortune to the "effective altruism" movement, underwrote essay prizes and evangelised for philanthropy. He even managed to keep his good name as the crypto crash started to bite. Where others might have been able to siphon off profit from retail investors, he bought up the shattered remains of consumer-facing non-banks and promised to protect their consumer deposits.

SBF didn't have a string of failed companies behind him; he hadn't built his riches by launching dubious assets and riding a speculative wave to wealth. Instead, he'd managed a career that seemed as close to conventional finance as you could get in the crypto industry. Start with a hedge fund: executing smart and cautious trades to spot market behaviour that can be pushed for a profit. His famous first trade was an attempt to close the "kimchi premium", the persistent difference between bitcoin prices in Korea and America. Profiting is less about noticing it - the differences are plain as day - and more about solving the logistical hurdles: can you get real money from Korea to America, buy bitcoin in the US, sell it at a profit in Korea and repeat it? Can you do it quickly? Can you do it without your accounts being frozen, without being arrested for suspected money laundering and without breaking capital controls?

Then grow your fund until you're big enough that you can start to make money simply by being the largest player willing to commit big sums to crypto. The hedge fund became famous for "yield farming" - profiting from crypto assets that promise a pseudo interest rate to those who hold them - and scale begat scale. He then launched a crypto exchange, because why gamble in the casino when you can run one? Well two, technically: one exchange in the Bahamas, where trading strategies can be attempted unencumbered by American regulation, and one in the US, where a much stricter set of rules allow crypto novices an on-ramp to the sector, sending cash direct from their bank account.